Monthly Archives: February 2017

The New Chinese Threat to the Dollar

Current Chinese and American monetary policies are diametrically opposed.

China has based its growth and rise to economic prominence on an export-led economic model, with the United States as a primary destination for Chinese-made goods. The result of this policy is a two trillion dollar foreign exchange reserve, of which roughly 60percent is denominated in dollars.

The US, on the other hand, has chosen a policy of monetary easing in to fight the current recession. It is running huge budget deficits, part of which is financed through money creation by the Federal Reserve. Such a vast increase in money supply can only lead to a devaluation of the dollar, which reduces the value of Chinese reserves.

The Chinese cannot allow thirty years worth of currency accumulation to evaporate as a result of inflationary US policy. They have sent US authorities repeated messages to that effect, including: top-level statements of concern; massive purchases of strategic metals; announcing their gold reserves are twice the size previously thought; reducing purchases of longer-term Treasury bonds.

The most recent Chinese move has been to start negotiations with Brazil to cut the dollar out of their mutual trade relations, which would rely on national currencies instead.

In response US Treasury Secretary Tim Geithner traveled to Beijing in late May to reassure the Chinese concerning US policies. Perfunctory statements of agreement were exchanged as he left China. But on the day after Mr. Geithner departed, China announced negotiations with Malaysia similar to those with Brazil: no more dollar-denominated trade there either.

In other words, the visit by Mr. Geithner solved nothing. However, it goes way beyond that. The announcement is not just another message to the United States. It can well be the start of a new monetary strategy.

The type of economic transaction under negotiation with Brazil and Malaysia is essentially a barter deal based on the relative values of the two national currencies involved. As China has a large economy involving many buyers and suppliers, such a type of transaction can be expanded to any number of its trading partners, thereby creating a fairly large dollar-free economic zone.

This would in the short term reduce the importance of the dollar as the dominant world currency. The ultimate effect would be much more far-reaching.
The global primacy of the dollar is to a great extent based on the assumption that there is no available substitute for it.

The above strategy of dollar-free transactions, which is quite workable, undermines this assumption by showing that in many cases such a substitute is not needed. All that is required is agreement on the relative value of two national currencies.

Furthermore, if demonstrated successfully between, for example, China and Brazil, such a bilateral commercial strategy could be applied to transactions between countries other than China. Russia and Germany, for example, could in the same manner exchange energy products for engineering goods and services.

Finally, this approach to trade would gradually extinguish the key role of the dollar in pricing commodities, such as oil, sugar, copper or grains. These commodities would de facto come to be priced in terms of a basket of currencies, based on the actual volume of transactions in the various national units of account.

The dollar would then be then reduced to being the national currency of the United States, with significant consequences for this country and for the rest of the world. The US, no longer able to rely on the prominence of the dollar in global finance, would like any other country be fully responsible for the value of its own currency.

The Chinese initiative is therefore no idle threat. Whether the Chinese government will implement this new strategy across the board or even on a large scale is unknown. Very possibly they have no definite plan at this point. But a whole realm of possibilities has been opened.

What is certain is that the US government must now face the fact that its policies, so far dictated strictly by domestic concerns, may in the very near future have a major and lasting impact on the status of its currency.

Jacek Popiel was born in Poland and educated in Africa, Canada, and the US. His career spanned military service and international business development. He is currently a writer and his first book Viable Energy Now will be published in the coming weeks. http://voyons-potsdemiel.blogspot.com

Gold Or Gilts – The Chinese Conundrum

The Chinese have always been known as very astute investors. Observe the massive success of Singapore, Hong Hong and Malaysia (economically driven largely by its 30% Chinese population), and the emerging mainland China today, to see why China-watching, particularly the investment activities of the emerging middle class, can be very worthwhile, and potentially extremely profitable.

China has become an economic powerhouse and its people are becoming economically independent. The successful Chinese are now free to exercise their own choices on where to invest their new-found wealth. Watch carefully. The investment activities of the new wealth-driven class are likely to be the pointers to the primary sentiments in the markets. Right now the focus is on gold and gold stocks. As the fear of global recession deepens, the Chinese are running to gold as a safe haven in, what are expected to be, difficult times.

The Chinese people are taking the lead from their government, which has increased its gold reserves by over 450 tons since 2003 and is undoubtedly anxious to get the balance right between gold and gilts, which has become the Chinese conundrum. They now own significantly in excess of 1000 tons. In today’s prices that is over $ 30,000,000.000 in value(or 30 billion dollars). They are the fifth largest holder of gold and likely to overtake the larger holders as they continue to consolidate their position. While other central banks have been dis-investing themselves of gold, China has been taking advantage of the opportunity to increase its holdings.

There has been speculation that the proposed sale of gold by the IMF to raise funds to cover their shortfall, may be used by China as a chance to increase its own holding still further. There was some concern that this move could depress the price of gold, but a significant price reduction now seems unlikely. Any effect is likely to be temporary.

China is now the world’s largest gold producer, overtaking South Africa in 2007, and the second largest purchaser of gold jewelery after India. China’s history of gold production is claimed to date back 3000 years, and the Zhou Yuan mine in Shandong province, which is still operating, has produced gold for over 1000 years.

China is holding in excess of $ 1 trillion (1000 times their current gold reserves in value). How will they preserve the value of their dollar reserves by buying Gold or gilts: the Chinese Conundrum. The US Treasury Secretary recently suffered the ignominy of embarrassed laughter from Chinese students in response to his claim that the US dollar was safe. They know that such a claim is unlikely to be correct while the US continues to flood the market with new money. It definitely makes sense to preserve the wealth of China by buying gold rather than the ‘gilts’ on offer by the US Treasury.

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